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Financial Rating is a system through which each company is associated a rating: very good, normal, or low according to its financial standing.
A very good financial rating reflects a high probability that a company will pay its dues on time to its trade partners or financial institutions, during the following 6-12 months.
The financial rating has been developed based on a number of financial ratios computed from the official financial statements of a large number of small and medium companies (SMEs) from Romania, and has been tested on their historic financial statements.
The Financial Rating Report is made of a number of sections, which offer relevant information regarding the current and historic financial standing of the company. The report comprise the following sections:
Each company is allocated a grade between 0 and 10, representing the comprehensive financial evaluation of the company, based on its financial statements.
This value is presented at the beginning of the report and has the following values:
- between 7 and 10 - "Very Good Rating" (green)
- between 5 and 7 - "Normal Rating" (grey)
- between 0 and 5 - "Low Rating" (red)
15 financial indicators are computed within the report, grouped in the main financial analysis categories: Profitability, Solvency, Liquidity, and Efficiency.
The value of each indicator is presented, and it is compared with the sector average of the company. Depending on the result of the comparison, each indicator can range between 1 and 5 and accordingly is evaluated as very good (green), normal (grey), or poor (red).
Based on these ratings, a company could perform better than its sector average on some categories (e.g. Profitability and Solvency), and poorer on others (e.g. Liquidity and Efficiency).
The evaluation of the financial indicators allows for the identification of company's risks in the following period.
The report presents in a graphic form comparisons between the company and sector averages, for a better reading of the information.
Graphs are drawn for the most important financial information: net sales, net profit (profitability), indebtedness, and cash conversion cycle.
These graphs allow for a simple and intuitive comparison between the company and its sector, and all the other companies in the industry, respectively. According to values obtained, the company is evaluated among the leaders or laggards of its sector.
Financial information is presented for the latest 4 fiscal years.
Data is structured so as to offer a true image of the financials submitted by the company to the fiscal authorities, and to ease the thorough analysis of the financials by experienced analysts.
Statements can be also downloaded in Excel format, at the same time with the PDF report, in order to facilitate their uploading in the local IT systems of the users. This option can be set from the client account in "Report Settings" menu.
According to these characteristics, you can asses if the company is among the largest in its sector, whether it is a top performer of the industry, or if it fulfills all necessary requirements for the business relationship you envisage. Financial soundness indicate whether you can consider a growing long term relationship with the company, or a rather incidental relationship, with no clear perspectives.
Risks associated with the company' s activity are drawn from the 4 main ratio categories analysed: profitability, solvency, liquidity, and efficiency. The most important risk factors and their potential consequences are::
- low profitability: the company is vulnerable to competitors' actions - if they reduce prices, it is possible that the company will have to sell at a loss or, alternatively, reduce its sales. At the same time, a low profitability may indicate diminished growth potential, vulnerability in face of macro conditions, difficulties in finding high quality suppliers of raw materials, or a poorly performing operational and financial management.
- low solvency: the company is very exposed against debt from financial institutions, suppliers and/ or the state budgets, and may face significant problems in covering those debts. Should one of those creditors changes the terms of financing, the company may be forced to take painful decisions with high financial costs on the short term, to overcome these issues.
- low liquidity: the company barely covers its short term debts with its current assets (inventories, receivables, etc). Among the most probable reasons, which lead to a poor liquidity are investment financing through ST debt, and low or negative sales margin. Under such circumstances, the company is significantly exposed to liquidity problems, whether one of its creditors or suppliers decides not to extend credit, or request reimbursement of existing debt.
- low efficiency: the company's production cycle is significantly longer than its sector average. The longer the production cycle, the more exposed the company is to external risks (market, competition, macro environment, etc), and its profits are put under pressure by the cost of debt and exchange rates. In general, poor operations management is one of the main causes of low efficiency.
The trade relationship with a commercial partner needs to be correlated with its financial performance. Otherwise, invoice payments and contract fulfillmentthere are at risk. It is very risky for example to sell goods worth 100.000 ron to a company, on term payments, if this company has an annul sales revenue of 20.000 ron. A correctly sized trade relationship keeps your business safe.
Through a detailed analysis of the financial ratios, one can thoroughly determine various aspects of a company's activity: how it gets financing, financial and operations management, profit structure, investment policy, etc. In order to analyze financial ratios, one would need advanced financial analysis knowledge, but ratios cand still be useful to any user, when he wants to compare a company with its competitors from the same industry.